The CFO chooses you to determine whether to purchase a new machine. The new machine should save
Question:
The CFO chooses you to determine whether to purchase a new machine. The new machine should save the company $700,000 annually. However, the new machine requires an additional $100,000 of net working capital. Management plans on depreciating the new equipment over 5 years using straight-line depreciation. Here are more details on the new and old machines.
New Machine: Cost: $2,750,000, Salvage Value 5yrs = $600,000 Tax Rate = 21% Required Rate of Return= 12%
Old Machine: Original Cost: $1,250,000 Book Value = 0 Salvage Value Today = $125,000 Salvage Value 5yrs = $ 30,000
Question:
Use the above information to calculate NPV and IRR. You start by calculating the incremental cash flows. Then discount those cash flows to find NPV. Should your company, accept to project or not? Why?
Intermediate Accounting
ISBN: 978-0077400163
6th edition
Authors: J. David Spiceland, James Sepe, Mark Nelson